Minimize risks when selling your business

Whenever I meet with business sellers, they want to know how to protect themselves in a way in which the new buyer meets the financial obligations and a smooth transfer of ownership occurs.

For many sellers, protecting themselves is more important than determining the value of the business.   What sellers need to keep in mind is that there is just as much risk in selling a business as there is starting a business.

Similarly, they can minimize their risk when selling as they did when starting the business.

Although there are no guarantees, a combination of the following can significantly reduce the risks to an owner selling their business.

Many of these suggestions, such as having an adequate training period for the new owner, having a good client base, having strong relationships with supplier, etc. are obvious.  However, many are not.

One common mistake is not getting enough of a down payment.  Few incentives inspire a new owner to succeed like the risk of a significant loss of their own money.  In simple terms, it is a lot harder to walk away from a $200,000 down payment then a $20,000 down payment.

Know the buyer.  This means more than having some of the same interests, common friends and a shared love of the Toronto Maple Leafs.  A seller needs to thoroughly review the buyer’s credit history, personal financial situation and accomplishments and life experiences.

A well-intentioned but common error sellers make is having a due-on-sale clause in the promissory note.  In some cases, buyers find that being a business owner is not what they thought it was going to be, or something has occurred in their life which has changed their desire to own the business.

This is exactly what happened with a home-improvement contractor.  An out-of-town family matter for the new owner forced the owner to leave the area.  Instead of closing the business without meeting his financial obligations to the original seller another buyer could be found to meet his conditions as well as the obligations to the original seller.  For the original seller, this meant that instead of having one buyer on the promissory note, he now has two.

Finally, securing the services of a good business broker to help the seller navigate through these issues can be good preventative medicine.  A qualified facilitator will structure the transaction to ensure that potential potholes are covered. 

By incorporating these obvious and not-so obvious suggestions, business sellers will be able to significantly increase the likelihood that they won’t have to come back into their business once they have left.

Do you have a small business question you would like answered about this article or others?

Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.